Promod Haque: Too many companies receive VC funding

Too much venture capital is being invested in too many startup companies, a scenario that brings to mind the challenges of the late 90s. That’s the warning from Promod Haque, a managing partner at Norwest Venture Partners and one of the most accomplished venture investors in the business.

Norwest’s Promod Haque

“There is no shortage of capital,” he said today at the Red Herring Global conference. “The challenge is that too many companies are getting funded without enough differentiation.”

Haque didn’t go so far to say the venture capital model is broken, but he thinks it is undergoing a major transition in which a shakeout will occur. He noted that only about 280 venture firms invested in more than three deals during a 12-month period, which he said means that the vast majority of firms are fairly inactive.

“I don’t think the industry is dying. I think the industry is consolidating and shrinking to some degree,” said Haque. “The challenge I think the industry faces is does the business model work? I think yes it does, but it doesn’t work for every firm.”

The industry also is changing as venture investors seek deals outside North America and in new industries such as clean tech, said Haque.

Venture capitalists like investing in China and India because the competitive pressures are not as intense, meaning the possibility for returns are bigger.

Haque also noted that it is tougher for companies in the U.S. to go public, not only due to federal regulations but also because it is hard for a company to maintain a market value of more than $500 million.

Companies, he said, are taking six to eight years and $60 million to $80 million in revenue to consider an IPO. Not many companies reach that threshold, he said.

“The challenge that all of us face as venture capitalists and entrepreneurs is how do you get a reasonable exit,” he said.